World reports

Stocks to watch

AAP

2013-01-25

All wars are about money, but some wars are more about money than others.

And this war is all about money.

There are no guns, no tanks, no drones.

Just cash, and lots of it.

It's called the currency wars.

And just because you've probably never heard of it, doesn't mean you wont suffer some collateral damage.

It comes down to this: the weaker a nation's currency is, the more competitive their domestic industries are.

So there is an incentive for countries facing a recession to do what they can to bring down the value of their currency.

Since 2010, the United States Federal Reserve has pumped hundreds of billions of dollars into the US economy through a policy known as quantitative easing (QE), which has the effect of stimulating growth but also pushes down the value of the currency.

It is one of the reasons the Australian dollar has risen sharply against the US dollar in recent years and remains above the 100 US cent mark.

"It's certainly not a coincidence that the several rounds of QE partaken by the Fed have had that effect on the US dollar," CMC foreign exchange dealer Tim Waterer told AAP.

"Certainly it has played a role in the Australian dollar's current elevated levels against the greenback."

Mr Waterer said the continuation of quantitative easing in the US meant the Australian dollar was likely to remain above the 100 US cent mark.

That puts pressure on Australian manufacturers, farmers and other companies by pushing up the relative cost of their exports, making it difficult for many to survive, let alone compete.

Meanwhile, the UK and Europe have both used forms of quantitative easing in recent years and lowered interest rates to support their economies, also pushing down the relative value of their currencies.

And Switzerland's central bank has directly intervened in foreign exchange markets to stop the Swiss franc gaining further value against the euro.

There are fears in some circles that central banks will become engaged in a "race to the bottom", to ensure their currency remains the cheapest, and their economy the most competitive.

Talk of a currency war escalated this week when the Bank of Japan announced it would boost its quantitative easing efforts as it attempts to achieve an inflation target of two per cent.

Anticipation of the move has helped push the Australian dollar higher against the yen - from about 80 yen in October to more than 94 yen this week.

Mr Waterer said the rally was likely to continue in 2013, with the Australian dollar expected to hit a record high of 110 yen.

But AMP chief economist Dr Shane Oliver said the currency war was not a deliberate conflict between central banks, but simply a consequence of efforts to boost growth.

"In a way the term currency wars is grossly exaggerated," he said.

"But even though it may not be a war anyone is consciously fighting, the currencies of countries undergoing quantitative easing and the unfortunate reality is Australia effectively gets caught in the middle of that."